Introduction: A guide to Medicare Part D bids for PACE organizations

Participants enrolled in a Program of All-Inclusive Care for the Elderly (PACE) organization receive prescription drug coverage through Medicare Part D. Each year, PACE organizations must submit a Part D bid to the Centers for Medicare and Medicaid Services (CMS). The Part D bid determines how much prospective monthly revenue a PACE organization receives from CMS to cover the expected drug spend of its participants, the administrative costs associated with offering the plan, and margin.

PACE organizations also receive revenue from CMS to cover participants’ medical spending, but they have less direct control over how much funding they receive for those services. Instead of submitting a Medicare Advantage Part C bid to CMS, PACE organizations accept a fixed monthly amount per participant that CMS adjusts for the county in which the PACE center operates, the participant's demographics and health status (as reflected in their risk score),¹ and the participant's end-stage renal disease (ESRD) status.

Required Part D bid submission materials for PACE

PACE organizations must upload each Part D bid to CMS’s Health Plan Management System (HPMS) by the first Monday in June. CMS provides standardized Excel workbooks, called bid pricing tools (BPTs), for organizations to complete and submit. In addition to the BPTs, organizations must submit supporting documentation describing the data sources and assumptions underlying the bid. After submission, CMS requires an actuarial certification for each bid. CMS releases instructions for completing the BPTs each year, which outline all necessary requirements for successful bid submission.

Part D bid development: Overview for PACE participants

The Part D bid for a given plan year determines the monthly revenue CMS prospectively pays to a PACE organization to cover three components:

• Participant’s drug costs
• Administrative expenses
• Margin

The BPTs show the development of projected total drug costs and reflect the complexity of the Part D benefit structure. Under the defined standard benefit in Medicare Part D, four stakeholders share the responsibility for total drug costs: drug manufacturers, CMS, plan participants, and plan sponsors (i.e., the PACE organization). Manufacturers cover a portion of drug costs through the manufacturer discount program (MDP), and CMS covers a portion of catastrophic claims through federal reinsurance.

The PACE organization’s share of the total drug cost is funded by CMS’s direct subsidy and the basic member premium. The direct subsidy is a fixed monthly amount CMS provides per participant and is adjusted for a participant’s Part D risk score. The basic member premium reflects the premium required for the remainder of drug costs under the defined standard benefit. CMS pays the basic premium for dual-eligible participants, while Medicare-only participants are responsible for paying the basic premium themselves.

Participants enrolled in PACE do not pay cost sharing. For dual-eligible participants, CMS provides subsidies to PACE organizations to cover the participant cost sharing amount. Medicare-only participants are not eligible for these cost-sharing subsidies. Instead, they pay a supplemental premium that covers the difference between the PACE benefit, under which participants do not pay cost sharing, and the defined standard benefit.

After the plan year, CMS reconciles projected and actual drug costs. About 40% of the total drug cost is reconciled dollar-for-dollar,² so the PACE organization receives or refunds the full difference between projected and actual costs. The remaining portion of total drug cost is subject to risk-sharing with CMS, where the PACE organization retains a portion of gains or absorbs a portion of losses.

The administrative expense portion of the Part D bid amount reflects the expected costs of administering the Part D plan. The BPTs require PACE organizations to input projected amounts for specific expense categories. CMS provides detailed guidance on the expenses that should be included or excluded when developing the estimates. A Part D bid may also include a provision for explicit margin, subject to CMS limits. Unlike the drug cost component of the bid, CMS does not retrospectively reconcile actual administrative expenses or margin amounts.

Sound Part D bid development is key for PACE organization success

A carefully constructed Part D bid is key to ensuring a PACE organization receives adequate funding to cover its actual drug costs, administrative expenses, and margin for the plan year. An oversight during bid development can leave an organization underfunded and create financial strain. Additionally, a poorly constructed bid may expose a PACE organization to compliance risk, because CMS scrutinizes bid assumptions in detail, compares actual experience against the bid’s projections, and issues findings for errors identified during audits. Given these risks, PACE organizations should consider dedicating sufficient time and resources to bid development each year to protect their financial position and their standing with CMS.

How an actuarial consultant can help a PACE program with its Medicare Part D bid

An actuarial consultant can help a PACE organization develop, document, and certify Medicare Part D bids that stand up to CMS scrutiny. Actuaries build defensible projections of drug costs, administrative expenses, and margin; prepare the required bid forms, supporting documentation, and actuarial certification; and estimate reconciliation results before CMS issues final settlements. They also support new PACE organizations submitting their first bid, provide drug-cost benchmarking and PBM contract insights, and conduct ongoing monitoring to identify opportunities to strengthen financial performance and compliance. These steps can result in a bid process that protects PACE program revenue, reduces audit risk, and supports long-term sustainability. For more information, please contact your Milliman PACE Consultant.

¹ CMS assigns participants risk scores reflecting their demographics and health status based on medical diagnosis codes. Risk scores are used to adjust capitated payments to PACE organizations. If a risk score is greater than 1.0, the participant is perceived to be less healthy than the average Medicare population; if the risk score is less than 1.0, the participant is perceived to be healthier than the average Medicare population.

² CMS reconciles federal reinsurance, MDP, and low income cost-sharing subsidies (LICS) dollar-for-dollar.